Arizona officials have passed new law providing a financial incentive to small companies that are advancing research and development programs.

Arizona Senate Bill 1254 offers taxpayers that employ less than 150 full-time employees a discounted refund of 75 cents for each dollar of an R&D tax credit already earned. Total refunds for all taxpayers are limited to $5 million per year.

"This legislation is good public policy that rewards small innovation-based companies for their investments in R&D and allows them to create high paying, high quality jobs in Arizona," said Steven Zylstra, president and CEO of the Arizona Technology Council.

Access to capital is the lifeblood of high-tech startup companies, especially in the early years when they are developing products but don't generate profits. Venture Capital is often the major source of early-stage funding, but Arizona ranked 39th in growth in VC investment from 2002 to 2008, according to a Milken Institute report on Arizona high-tech development issued in December, 2009.

By modifying Arizona's existing R&D Tax Credit legislation to allow for the discounted refund as opposed to strictly a tax credit, SB 1254 puts cash in the pockets of entrepreneurs who are often trying to move from research to prototyping and limited production. In return, the state actually reduces its liability by applying the 25% discount to its accrued tax credit obligation.

"In many ways this legislation is really a capital formation initiative," said Howard Stewart, president, AGM Container Controls, who testified in favor of the legislation. " Arizona has become creative in how it is mobilizing funds in the private sector to grow our economy."

The R&D Tax Credit has proven successful. According to recent data from the Department of Revenue, in 2007 161 individual taxpayers claimed $2.6 million in credits while 185 corporate taxpayers claimed $43.8 million.